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High-yield focus underperforms the market

Scott Kelly
By Sarah Kendell
21 November 2019 — 1 minute read

Focusing purely on high yields in stock selection is likely to generate poor outcomes for equities investors in terms of long-term performance, meaning retirees should focus more on dividend sustainability rather than size, according to DNR Capital.

The fund manager conducted modelling on the top 10 highest yielding stocks of the ASX and their performance over one, three and five-year benchmarks, and found that a portfolio consisting of these 10 stocks would have underperformed the ASX 200 Accumulation Index by 4.4 per cent in the last year, 5 per cent in the last three years and 5.6 per cent in the last five years.

The stocks included the big four banks, BHP, Rio Tinto, Suncorp and Wesfarmers.

DNR Capital equity income portfolio manager Scott Kelly said the results showed a pure-yield focus was “too simple and fraught with unacceptable risks” for income-focused investors.

“It’s a headline variable that is easily understood, but often high yield can be a red flag,” Mr Kelly said.

“For example, consider [that] high yields can indicate companies are facing structural headwinds and dividends might be at risk of being cut; yield strategies have become increasingly impacted by interest rate expectations which exposes these stocks to macro top-down volatility; and sources of yield shift over time.

“In our view, an investor needs to consider a substantial number of factors when assessing a dividend’s sustainability and capacity for growth.”

He added that the group was more focused on quality companies that could demonstrate the ability to sustain and grow dividends over time when selecting income-focused stocks to invest in.


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